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| GNCMA > SEC Filings for GNCMA > Form 10-Q/A on 21-Nov-2008 | All Recent SEC Filings |
21-Nov-2008
Quarterly Report
In the following discussion, GCI and its direct and indirect subsidiaries are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to unbilled revenues, Cost of Goods Sold accruals, allowance for doubtful accounts, share-based compensation, depreciation, amortization and accretion periods, intangible assets, income taxes, effective tax rate, purchase price allocation, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also our "Cautionary Statement Regarding Forward-Looking Statements."
On November 5, 2008, we concluded that we should restate our previously issued quarterly results for the quarter ended June 30, 2008 to correct the error described below. The corrections made as part of the restatement of our results of operations for the three and six months ended June 30, 2008 follow:
· We increased depreciation expense $4.0 million and $8.5 million for the three and six months ended June 30, 2008, respectively, to correct depreciation expense for a failure to change the estimated useful life of certain assets that were expected to be decommissioned at or near the end of 2008. The assets should have been depreciated over the remaining period they were expected to be used;
· We decreased minority interest expense $920,000 and $1.9 million for the three and six months ended June 30, 2008, respectively, to record the minority interest portion of the correction described above, and;
· We decreased income tax expense $1.4 million and $2.8 million for the three and six months ended June 30, 2008, respectively, to record the income tax effect of the corrections described above.
The impact of the restatement as described above for the period presented is as follows (amounts in thousands, except per share amounts):
June 30, 2008
As previously
Consolidated Condensed Balance Sheet reported1 Adjustments As restated
Assets
Total current assets $ 225,213 --- 225,213
Property and equipment in service, net of
depreciation 692,561 (8,462 ) 684,099
Construction in progress 115,809 --- 115,809
Net property and equipment 808,370 (8,462 ) 799,908
Total other assets 301,174 --- 301,174
Total assets $ 1,334,757 (8,462 ) 1,326,295
Liabilities, Minority Interest, and Stockholders'
Equity
Total current liabilities 117,772 --- 117,772
Long-term debt 702,952 --- 702,952
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Obligations under capital leases, excluding current maturities 96,254 --- 96,254 Obligation under capital lease due to related party, excluding current maturity 1,864 --- 1,864 Deferred income taxes 89,315 (2,750 ) 86,565 Long-term deferred revenue 37,738 --- 37,738 Other liabilities 19,766 --- 19,766 Total liabilities 1,065,661 (2,750 ) 1,062,911 Minority interest 6,502 (1,946 ) 4,556 Stockholders' equity: Class A common stock 150,706 --- 150,706 Class B common stock 2,750 --- 2,750 Less cost of Class A and Class B common shares held in treasury (3,422 ) --- (3,422 Paid-in capital 23,522 --- 23,522 Retained earnings 89,038 (3,766 ) 85,272 Total stockholders' equity 262,594 (3,766 ) 258,828 Total liabilities, minority interest, and stockholders' equity 1,334,757 (8,462 ) 1,326,295 |
1 As reported on Form 10-Q for the quarter ended June 30, 2008
Three Months Ended June 30, 2008
As previously
reported1 Adjustments As restated
Revenues $ 142,461 --- 142,461
Cost of goods sold (exclusive of depreciation and
amortization shown separately below) 52,448 --- 52,448
Selling, general and administrative expenses 48,260 --- 48,260
Depreciation and amortization expense 23,707 4,001 27,708
Operating income 18,046 (4,001 ) 14,045
Other income (expense):
Interest expense (10,899 ) --- (10,899 )
Loan and senior note fees (879 ) --- (879 )
Interest income 402 --- 402
Minority interest 26 920 946
Other expense, net (11,350 ) 920 (10,430 )
Income before income tax expense 6,696 (3,081 ) 3,615
Income tax expense 3,191 (1,408 ) 1,783
Net income $ 3,505 (1,673 ) 1,832
Basic net income per common share $ 0.07 (0.03 ) 0.04
Diluted net income per common share $ 0.07 (0.04 ) 0.03
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1 As reported on Form 10-Q for the quarter ended June 30, 2008
Six Months Ended June 30, 2008
As previously
reported1 Adjustments As restated
Revenues $ 277,135 --- 277,135
Cost of goods sold (exclusive of depreciation and
amortization shown separately below) 103,759 --- 103,759
Selling, general and administrative expenses 94,666 --- 94,666
Depreciation and amortization expense 46,489 8,462 54,951
Operating income 32,221 (8,462 ) 23,759
Other income (expense):
Interest expense (19,584 ) --- (19,584 )
Loan and senior note fees (1,102 ) --- (1,102 )
Interest income 483 --- 483
Minority interest (24 ) 1,946 1,922
Other expense, net (20,227 ) 1,946 (18,281 )
Income before income tax expense 11,994 (6,516 ) 5,478
Income tax expense 5,960 (2,750 ) 3,210
Net income $ 6,034 (3,766 ) 2,268
Basic net income per common share $ 0.12 (0.08 ) 0.04
Diluted net income per common share $ 0.11 (0.07 ) 0.04
Cash provided by operating activities $ 109,457 --- 109,457
Cash used in investing activities (155,977 ) --- (155,977 )
Cash used in financing activities 129,149 --- 129,149
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1 As reported on Form 10-Q for the quarter ended June 30, 2008
On June 11, 2008, we filed a Form 10K/A (Amendment No. 2) with the SEC to reflect the restatement of our summary of unaudited quarterly results of operations for the year ended December 31, 2007. We made the following corrections as part of the restatement of our results of operations for the three and six months ended June 30, 2007:
· We decreased depreciation expense $590,000 and $1.5 million for the three and six months ended June 30, 2007, respectively, to correct an error in calculating depreciation in the initial year an asset is placed in service. We originally recorded our estimated depreciation expense evenly throughout the year with periodic adjustments based upon improved estimates or actual results. In accordance with GAAP we now initially record depreciation expense in the month an asset is placed in service. Depreciation was improperly allocated among quarters, but the year-end total was correct. Therefore the restatement impacts the quarterly results but not the December 31, 2007 year-end results.
Additionally we corrected the 2007 quarters for errors that have been determined to be immaterial individually and in the aggregate. Other than interest capitalization, these immaterial errors do not impact the December 31, 2007 results. They are as follows:
· We decreased interest expense $384,000 and $766,000 for the three and six months ended June 30, 2007, respectively, to correct an interest capitalization error on certain assets. Our capitalized interest policy was too restrictive and resulted in no interest capitalization on certain qualifying capital expenditures. Our capitalized interest policy now conforms to GAAP;
· We increased depreciation expense $322,000 and $644,000 for the three and six months ended June 30, 2007, respectively, due to the recognition of depreciation on additional capitalized interest;
· We increased revenue $173,000 and $492,000 for the three and six months ended June 30, 2007, respectively, to correct understated revenue resulting from a configuration error in the automated interface between our unified billing system and our general ledger;
· We increased revenue $125,000 and $258,000 for the three and six months ended June 30, 2007, respectively, to correct revenue recognition for a majority noncontrolling interest in a subsidiary that was recognizing a certain type of revenue on a cash basis rather than an accrual basis;
· We decreased share-based compensation expense $715,000 and $757,000 for the three and six months ended June 30, 2007, respectively, to correct expense recognition timing for options that did not vest in equal increments over the vesting period;
· We decreased depreciation expense $37,000 and $75,000 for the three and six months ended June 30, 2007, respectively, due to a revision of the purchase price allocation of our purchase of Alaska DigiTel on January 1, 2007; and
· We increased income tax expense $799,000 and $1.5 million for the three and six months ended June 30, 2007, respectively, to record the income tax effect of the corrections described above.
The impact of the restatement and immaterial error correction adjustments and the reclassification as described above for the periods presented are as follows (amounts in thousands, except per share amounts):
Three Months Ended June 30, 2007
As previously
reported1 Adjustments Reclassification As restated
Revenues $ 129,592 298 --- 129,890
Cost of goods sold (exclusive of
depreciation and amortization shown
separately below) 42,238 --- 3,341 45,579
Selling, general and administrative
expenses 47,486 (715 ) (3,341 ) 43,430
Depreciation and amortization expense 21,742 (305 ) --- 21,437
Operating income 18,126 1,318 --- 19,444
Other income (expense):
Interest expense (8,941 ) 384 --- (8,557 )
Loan and senior note fees (216 ) --- --- (216 )
Interest income 161 --- --- 161
Minority interest (24 ) --- --- (24 )
Other expense, net (9,020 ) 384 --- (8,636 )
Income before income tax expense 9,106 1,702 --- 10,808
Income tax expense 4,091 799 --- 4,890
Net income $ 5,015 903 --- 5,918
Basic net income per common share $ 0.09 0.02 --- 0.11
Diluted net income per common share $ 0.09 0.01 --- 0.10
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1 As reported on Form 10-Q for the quarter ended June 30, 2007
Six Months Ended June 30, 2007
As previously
reported1 Adjustments Reclassification As restated
Revenues $ 254,171 750 --- 254,921
Cost of goods sold (exclusive of
depreciation and amortization shown
separately below) 85,351 --- 8,218 93,569
Selling, general and administrative
expenses 96,010 (757 ) (8,218 ) 87,035
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Depreciation and amortization expense 43,196 (893 ) --- 42,303 Operating income 29,614 2,400 --- 32,014 Other income (expense): Interest expense (17,641 ) 766 --- (16,875 ) Loan and senior note fees (396 ) --- --- (396 ) Interest income 345 --- --- 345 Minority interest (11 ) --- --- (11 ) Other expense, net (17,703 ) 766 --- (16,937 ) Income before income tax expense 11,911 3,166 --- 15,077 Income tax expense 5,366 1,487 --- 6,853 Net income $ 6,545 1,679 --- 8,224 Basic net income per common share $ 0.12 0.03 --- 0.15 Diluted net income per common share $ 0.11 0.03 --- 0.14 Cash provided by operating activities $ 54,469 766 --- 55,235 Cash used in investing activities (87,027 ) (766 ) --- (87,793 ) Cash used in financing activities (16,752 ) --- --- (16,752 ) |
1 As reported on Form 10-Q for the six months ended June 30, 2007
All adjustments noted above have been included in the amounts for the three and six months end June 30, 2008 and 2007 shown in Management's Discussion and Analysis.
General Overview
Through our focus on long-term results, acquisitions, and strategic capital investments, we strive to consistently grow our revenues and expand our margins. We have historically met our cash needs for operations, regular capital expenditures and maintenance capital expenditures through our cash flows from operating activities. Historically, cash requirements for significant acquisitions and major capital expenditures have been provided largely through our financing activities.
Reportable Segments
Services and Products Consumer Network Access Commercial Managed Broadband Regulated Operations
Voice:
Long-distance X X X X
Local Access X X X X
Directories X
Video X X
Data:
Internet X X X X X
Data Networks X X X
Managed Services X X
Managed Broadband Services X
Wireless X X X X
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An overview of our services and products follows.
Voice Services and Products
Long-distance
We generate long-distance services revenues from monthly plan fees and usage
charges.
Factors that have the greatest impact on year-to-year changes in long-distance services revenues include the rate per minute charged to customers and usage volumes expressed as minutes of use.
Common carrier traffic routed to us for termination in Alaska is largely dependent on traffic routed to our common carrier customers by their customers. Pricing pressures, new program offerings, and market and business consolidations continue to evolve in the markets served by our other common carrier customers. If, as a result, their traffic is reduced, or if their competitors' costs to terminate or originate traffic in Alaska are reduced, our traffic will also likely be reduced, and our pricing may be reduced to respond to competitive pressures, consistent with federal law. Additionally, disruption in the economy resulting from terrorist attacks and other attacks or acts of war could affect our carrier customers. We are unable to predict the effect on us of such changes or events. However, given the materiality of other common carrier revenues to us, a significant reduction in traffic or pricing could have a material adverse effect on our financial position, results of operations and liquidity.
AT&T acquired Dobson Communications Corporation ("Dobson"), including its Alaska properties, on November 15, 2007. In December 2007 we signed an agreement with AT&T that provides for an orderly four-year transition of our wireless customers from the Dobson/AT&T network in Alaska to our wireless facilities to be built in 2008 and 2009. The agreement allows our current and future customers to use the AT&T wireless network for local access and roaming during the transition period. The four-year transition period, which expires June 30, 2012, provides us with adequate time to replace the Dobson/AT&T network in Alaska with our own wireless facilities. Under the agreement, AT&T's obligation to purchase network services from us terminated as of July 1, 2008. AT&T provided us with a large block of wireless network usage at no charge to facilitate the transition of our customers to our facilities. We will pay for usage in excess of that base
Due in large part to the favorable synergistic effects of our bundling strategy focused on consumer and commercial customers, long-distance service continues to be a significant contributor to our overall performance, although the migration of traffic from our voice products to our data and wireless products continues.
Our long-distance service faces significant competition from ACS, AT&T Alascom, Inc. ("Alascom"), Matanuska Telephone Association ("MTA"), long-distance resellers, and certain smaller rural local telephone companies that have entered the long-distance market. We believe our approach to developing, pricing, and providing long-distance services and bundling different business segment services will continue to allow us to be competitive in providing those services.
Local Access
We generate local access services revenues from four primary sources: (1) basic
dial tone services; (2) data network and special access services; (3)
origination and termination of long-distance calls for other common carriers;
and (4) features and other charges, including voice mail, caller ID, distinctive
ring, inside wiring and subscriber line charges.
The primary factors that contribute to year-to-year changes in local access services revenues include the average number of subscribers to our services during a given reporting period, the average monthly rates charged for non-traffic sensitive services, the number and type of additional premium features selected, the traffic sensitive access rates charged to carriers and amounts received from the Universal Service Program.
We estimate that our June 30, 2008 and 2007 total lines in service represent a statewide market share of approximately 33% and 27%, respectively. At June 30, 2008 and 2007, 66% and 48%, respectively, of our lines, including the lines of UUI at June 30, 2008, are provided on our own facilities.
Our local access service faces competition in Anchorage, Fairbanks, and Juneau from ACS, which is the largest incumbent local exchange carrier ("ILEC") in Alaska, and from Alascom in Anchorage for consumer services. Alascom has received certification from the Regulatory Commission of Alaska ("RCA") to provide local access services in Fairbanks and Juneau. In February 2007, we began offering local access service in certain MTA exchanges and face competition from MTA. In October 2007, we began offering local access service in the Kenai-Soldotna area and face competition from the ACS, the ILEC in this area. We compete against other smaller ILECs in certain smaller communities. We believe our approach to developing, pricing, and providing local access services and bundling different services will allow us to be competitive in providing those services.
We are continuing to expand our local access service areas and will offer services in these new areas using a combination of methods. To a large extent, we plan to use our existing coaxial cable network to deliver local access services. Where we do not have cable facilities, we may resell other carriers' services, lease portions of an existing carrier's network or seek wholesale discounts.
In 2008 we plan to continue to deploy Digital Local Phone Service ("DLPS") lines which utilize our coaxial cable facilities. This service delivery method allows us to utilize our own cable facilities to provide local access service to our customers and avoid paying local loop charges to the ILEC.
On May 1, 2008, the FCC issued an order adopting the recommendation of the Joint Board to impose a state-by-state interim cap on high cost funds to be . . .
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